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How Natural Gas Could React to EIA Inventory Data

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Inventories spread

In the week ending June 7, the inventories spread was -9.9%. During this period, the negative inventories spread contracted by ~90 basis points compared to the previous week. On June 13, the EIA (U.S. Energy Information Administration) reported the natural gas inventory data for the week ending June 7. The inventories spread is the difference between natural gas inventories and their five-year average.

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Since June 13, the natural gas July futures have risen 0.1%. During the same period, natural gas–weighted stocks Range Resources (RRC), Chesapeake Energy (CHK), and Southwestern Energy (SWN) rose 1.3%, 3.8%, and 4.8%, respectively, and outperformed their peers. However, weaker natural gas prices amid the contracting negative inventories spread might drag these natural gas–weighted stocks going forward. Range Resources, Chesapeake Energy, and Southwestern Energy operate with a production mix of 69.2%, 69.4%, and 78.8% in natural gas.

Required change in inventories

The natural gas price is usually inversely related to the inventories spread. However, the relationship seems to be more biased toward a price downside when inventories rise above the five-year average. The market might be confident about having enough future supply instead of being concerned about demand getting out of hand.

On June 20, the EIA is scheduled to release its natural gas inventory report for the week ending June 14. Any rise less than ~76 Bcf (billion cubic feet) could cause the inventories spread to expand more into the negative territory. However, Reuters analysts expect an addition of 113 Bcf, which would contract the negative inventories spread by ~1.5 percentage points—a concern for natural gas–weighted stocks.

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